Money funds see record $90 billion one-day drop

SamMamudi

NEW YORK (MarketWatch) -- Money market funds saw nearly $90 billion of net investor cash pulled out on Wednesday, among the largest single-day drops in history.

Figures from iMoneyNet show that assets dropped to $3.35 trillion from $3.44 trillion, a fall of $89.2 billion.

Among the funds hit hardest by the redemptions was the $12.3 billion Putnam Prime Money Market Fund
PPMXX
institutional fund, which saw such a severe run on its assets that Putnam Investments, a subsidiary of Great West Lifeco Inc.
GWLI
said Thursday it would liquidate the fund.

Also Wednesday, it was revealed that money market funds managed by Bank of New York Mellon Corp.'s
BK, -1.42%
Dreyfus and Columbia Management, the fund arm of Bank of America Corp.
BAC, -0.31%
held commercial paper issued by Lehman Brothers Holdings
LEHMQ
and needed support from their parent companies to maintain their $1 a share net asset value.

Figures from iMoneyNet show that $130 billion left prime institutional money market funds Wednesday. This follows $61 billion of redemptions on Monday and $37.2 billion of redemptions on Tuesday.

"This is the largest week of outflows that we've ever had," said Connie Bugbee, managing editor of iMoneyNet. "It's not even close." She added that some of the outflows, perhaps as much as $20 billion may be due to companies moving money around because Monday was quarterly corporate tax day.

Putnam said that the run on its fund made it unable to keep the afloat. "Constraints on liquidity in money market instruments created the risk that in order to process redemptions, the fund would realize losses in selling its portfolio securities," it said in a statement. "The Trustees determined to close the fund to ensure equitable treatment of all fund shareholders."

The statement did not say when shareholders will receive their money, nor did it say whether the payouts would maintain the fund's $1 a share net asset value.

"This action is specific to the Prime Money Market in reaction to that fund's circumstances and redemption pressures and does not affect any other Putnam money market fund," said Laura McNamara, spokeswoman.

Investors continued their flight to quality. Government institutional funds saw assets grow by $47.2 billion Wednesday. Figures released earlier this week by iMoneyNet showed that $35 billion headed into government institutional on Monday and Tuesday. See full story

The move into Treasuries presents its set of headaches for firms. With yields at historic lows, some funds may have to consider waiving management fees to ensure that yields aren't negative. Some money market funds made similar moves in the wake of the market turmoil following Bear Stearn's collapse and in 2003-2004 when rates were around 1%.

"This is a phenomenon that would only matter if it continues," said Peter Crane, president of market research firm Crane Data.

Columbia, Dreyfus take steps

Columbia said in a shareholder letter Wednesday that it also held American International Group Inc.
AIG, -0.11%
debt.

"The Bank of New York Mellon entered into support agreements with [the funds], pursuant to which BNY Mellon will support the value of Lehman notes held in the Funds," said Dreyfus in a statement posted to its Web site Wednesday.

"These agreements are intended to ensure that a decline in the value of the Lehman notes will not result in a decline in the share price of the funds below $1."

A Dreyfus spokeswoman said that none of its money market funds hold AIG or Washington Mutual Inc.
WM, -0.13%
debt. Dreyfus posts its money market holdings on its Web site daily.

Columbia said in its letter that its money market funds didn't hold Washington Mutual debt, and that its AIG holdings mature on or before October 6. A spokesman didn't return a call.

"Bank of America and Columbia Management have taken a number of steps to manage the money market mutual funds during this unprecedented period, such as providing capital support to the funds, purchasing certain assets from the funds, and other measures to seek to ensure that the retail money market funds continue to transact at $1," said Columbia.

"As we have stated previously, Bank of America may provide additional support in the future to the money market mutual funds, but it is under no obligation to do so."

Columbia manages just under $144 billion of money market assets and Dreyfus has about $250 billion in its money market funds.

As well as Dreyfus, Columbia and The Reserve, three other money market fund companies held Lehman paper when the company declared bankruptcy: Evergreen Investments, the fund arm of Wachovia Corp.
WB, -0.49%
Northwestern Mutual Life Insurance Co.'s Russell Investments and RiverSource Investments, the fund arm of Ameriprise Financial Inc.
AMP, -1.66%See full story

Separately on Thursday, Fitch Ratings withdrew its AAA/V1+ ratings for 17 money market funds managed by Lehman Brothers Asset Management, an indirect subsidiary of Lehman. "The ratings withdrawals reflect the uncertain and evolving status of Lehman Brothers Asset Management's strategic direction and stability of its investment platform following the bankruptcy filing by its parent company," said Fitch.

Moody's Investors Service also said it may downgrade the Aaa ratings on 13 money market funds and one bond fund that are sponsored by Lehman. Moody's said it has liquidity and prospective operational concerns related to the ability of the funds to sustain increasing levels of redemptions.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.